SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-22696
DISC GRAPHICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3678012
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Gilpin Avenue, Hauppauge, New York 11788-8831
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 234 -1400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of June 30, 1999, 5,518,352 shares of the Registrant's Common Stock, par
value $.01, were outstanding.
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DISC GRAPHICS, INC.
FORM 10-Q
Quarter Ended June 30, 1999
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets as of June 30, 1999 (unaudited)
and December 31, 1998................................. 3
Consolidated Statements of Income for the Three and
Six Months Ended June 30, 1999 and 1998 (unaudited)... 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 1998 (unaudited) ............. 5
Notes to Unaudited Consolidated Financial Statements ...........6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................8
Item 3 Quantitative and Qualitative Disclosures About Market Risk..........13
PART II - OTHER INFORMATION
Item 1 Legal Proceedings ..................................................14
Item 2 Changes in Securities and Use of Proceeds ..........................14
Item 3 Defaults Upon Senior Securities ....................................14
Item 4 Submission of Matters to a Vote of Security Holders ................14
Item 5 Other Information ..................................................14
Item 6(a) Exhibits ...........................................................14
Item 6(b) Reports on Form 8-K ................................................14
Signatures ............................................................15
Exhibit Index ............................................................16
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DISC GRAPHICS, INC.
Consolidated Balance Sheets
As of June 30, 1999 (unaudited) and December 31, 1998
<TABLE>
June 30, 1999 December 31, 1998
(unaudited)
Assets
Current assets:
<S> <C> <C>
Cash $ 583,282 $ 43,313
Accounts receivable, net of allowance for doubtful accounts
of $1,338,000 and $1,332,000, respectively 10,643,673 12,721,102
Inventories 2,602,269 2,379,627
Prepaid expenses and other current assets 400,403 271,462
Deferred income taxes 963,000 963,000
------- -------
Total current assets 15,192,627 16,378,504
Plant and equipment, net 10,455,134 9,997,743
Goodwill, net of amortization of $266,295 and $221,979, respectively 1,228,894 1,265,210
Security deposits and other assets 1,728,886 730,084
--------- -------
Total assets $ 28,605,541 $ 28,371,541
=============== ==============
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of equipment notes payable $ 95,183 $ 123,948
Current portion of long-term debt 67,500 112,613
Current maturities of capitalized lease obligations payable 1,497,596 1,433,328
Accounts payable and accrued expenses 5,437,735 5,208,478
Income taxes payable 628,433 815,952
------- -------
Total current liabilities 7,726,447 7,694,319
Long term debt, less current maturities 511,875 1,415,625
Equipment notes payable, less current maturities 15,454 53,325
Capitalized lease obligations payable, less current maturities 4,087,635 3,944,868
Deferred income taxes 1,323,000 1,323,000
--------- ---------
Total liabilities 13,664,411 14,431,137
Stockholders' equity:
Preferred stock:
$.01 par value; authorized 5,000 shares; no shares issued
and outstanding --- ---
Common stock:
$.01 par value; authorized 20,000,000 shares; issued
5,548,761 shares 55,488 55,488
Additional paid in capital 5,009,671 5,009,671
Retained earnings 9,907,577 8,906,581
--------- ---------
Less: 14,972,736 13,971,740
Treasury stock, at cost, 30,409 and 30,349 shares at
June 30, 1999 and December 31, 1998, respectively (31,606) (31,336)
------- -------
Total stockholders' equity 14,941,130 13,940,404
---------- ----------
Total liabilities and stockholders' equity $ 28,605,541 $ 28,371,541
=============== ==============
</TABLE>
See accompanying notes to unaudited Consolidated Financial Statements
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DISC GRAPHICS, INC.
Consolidated Statements of Income
For the Three and Six Months Ended June 30, 1999 and 1998
(unaudited)
<TABLE>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales $ 14,707,675 $ 14,305,668 $ 29,602,670 $ 26,918,128
Cost of sales 10,616,965 10,465,860 22,087,438 20,180,888
---------- ---------- ---------- ----------
Gross profit 4,090,710 3,839,808 7,515,232 6,737,240
Operating Expenses:
Selling and shipping 1,538,135 1,455,147 3,061,675 2,828,901
General and administrative 1,280,366 1,169,153 2,556,046 2,325,189
--------- --------- --------- ---------
Operating income 1,272,209 1,215,508 1,897,511 1,583,150
Interest expense, net 108,592 170,653 231,515 341,610
------- ------- ------- -------
Income before provision for income 1,163,617 1,044,855 1,665,996 1,241,540
taxes
Provision for income taxes 464,000 412,615 665,000 491,616
------- ------- ------- -------
Net income $ 699,617 $ 632,240 $ 1,000,996 $ 749,924
=========== ============== ============= ===============
Net income per share:
Basic $ 0.13 $ 0.12 $ 0.18 $ 0.14
========== ============= ============= ===============
Diluted $ 0.13 $ 0.12 $ 0.18 $ 0.14
========== ============= ============= ===============
Weighted average number of
shares outstanding
Basic 5,518,352 5,450,066 5,518,370 5,439,994
Diluted 5,543,358 5,462,409 5,549,510 5,454,930
</TABLE>
See accompanying notes to unaudited Consolidated Financial Statements
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<PAGE>
<TABLE>
DISC GRAPHICS, INC.
Consolidated Statement of Cash Flows
For the Six Months Ended June 30, 1999 and 1998
(unaudited)
June 30, 1999 June 30, 1998
Cash flows from operating activities:
<S> <C> <C>
Net income $ 1,000,996 $ 749,924
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 945,260 979,409
Allowance for doubtful accounts 212,416 194,059
Changes in assets and liabilities:
Accounts receivable 1,865,013 (605,872)
Inventory (222,642) (312,783)
Prepaid expenses and other current assets (136,941) (11,647)
Accounts payable and accrued expenses 229,258 610,076
Income taxes payable (187,519) 242,485
Security deposits and other assets (1,011,005) (143,702)
---------- --------
Net cash provided by operating activities 2,694,836 1,701,949
--------- ---------
Cash flows from investing activities:
Capital expenditures (346,233) (495,707)
Purchase of net assets of business acquired ----- 2,626
Proceeds from sale of equipment ----- 21,900
--------- --------
Net cash used in investing activities (346,233) (471,181)
-------- --------
Cash flows from financing activities:
Repayments of long-term debt, net of proceeds (948,863) (479,069)
Principal payments of equipment notes payable (66,636) (227,278)
Principal payments of capital lease obligations (792,865) (512,371)
Payments of notes receivable ---- 24,579
Purchase of treasury stock (270) (1,175)
Purchase of warrants ----- (34,375)
----- -------
Net cash used in financing activities (1,808,634) (1,229,689)
---------- ----------
Net increase in cash 539,969 1,079
Cash at December 31 43,313 31,753
------ ------
Cash at June 30 $ 583,282 $ 32,832
=============== ================
Cash paid during the year for:
Interest $ 251,951 350,983
=============== =======
Income taxes $ 852,520 262,830
=============== =======
</TABLE>
See accompanying notes to unaudited Consolidated Financial Statements
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<PAGE>
DISC GRAPHICS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
General
The consolidated financial statements included herein have been
prepared by Disc Graphics, Inc. and subsidiaries (the "Company") without audit.
Certain information and footnote disclosures normally included in the
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to the rules and regulations of
the Securities and Exchange Commission. Although the Company believes that the
disclosures made herein are adequate to make the information presented not
misleading, it is recommended that these financial statements be read in
conjunction with the audited Consolidated Financial Statements and the Notes
thereto for the year ended December 31, 1998 included in the Company's Annual
Report on Form 10-K for its fiscal year ended December 31, 1998. The December
31, 1998 figures included herein were derived from such audited Consolidated
Financial Statements. In the opinion of management, the information furnished
herein reflects all adjustments that are necessary to present fairly such
information.
Earnings Per Share
Earnings per share is computed in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 128. Basic earnings per
share is computed by dividing income available to common stockholders (which,
for the Company, equals its recorded net income) by the weighted average number
of common shares outstanding during the period. Diluted earnings per share
reflects the potential dilution that would occur if all securities exercisable
or exchangeable for or convertible into shares of common stock that were
outstanding during the period, such as stock options and warrants, were
exercised or exchanged for or converted into shares of common stock. The
computation of weighted average shares outstanding used in the calculation of
diluted earnings per share does not include shares of common stock that would be
issuable upon the exercise of the Company's outstanding Class A Warrants,
because the exercise price of such warrants exceeded the market price of the
Company's common stock during the relevant periods.
Inventories
Inventories consist of the following:
June 30, 1999 December 31, 1998
Raw materials $1,627,896 $1,577,349
Work-in-process 634,926 659,552
Finished goods 339,447 142,726
----------- ----------
$2,602,269 $2,379,627
========== ==========
Non-Cash Financing and Investing Activities
Capital lease obligations of $999,900 were incurred in 1999 when the
Company entered into leases for new machinery and equipment.
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New Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement No. 133
related to "Accounting for Derivative Instruments and Hedging Activities.
Statement No. 133 is not expected to have a material impact on the consolidated
financial statements of the Company.
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DISC GRAPHICS, INC.
This Form 10-Q contains predictions, projections and other statements
about the future that are intended to be "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties, and
other important factors that could cause the actual results, performance or
achievements of the Company, or industry results, to differ materially from
those expressed or implied by such statements. Such risks, uncertainties, and
other important factors include, among others: the Company's ability to sustain
current growth rates in net sales of certain products; the potential inability
of the Company to implement its marketing and other business strategies; the
amounts required for capital expenditures in future periods; the availability
and cost of materials; potential effects of Year 2000 problems on the Company's
business; and continuing industry-wide pricing pressures and other industry
conditions. Such forward-looking statements speak only as of the date of this
Report, and the Company disclaims any obligation or undertaking to update such
statements. Each forward-looking statement that the Company believes is material
is accompanied by one or more cautionary statements identifying important
factors that could cause actual results to differ materially from those
described in the forward-looking statement. The cautionary statements are set
forth following the forward-looking statement, in other sections of this Form
10-Q, and/or in the Company's other documents filed with the Securities and
Exchange Commission, whether or not such documents are incorporated herein by
reference. In assessing forward-looking statements, readers are urged to read
carefully all such cautionary statements.
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
General
The following discussion and analysis of the financial condition and
results of operations of Disc Graphics, Inc. and its subsidiaries (collectively
"Disc Graphics" or the "Company") for the three- and six-month periods ended
June 30, 1999 should be read in conjunction with the unaudited Consolidated
Financial Statements and the Notes thereto included elsewhere in this Report,
and the Company's Annual Report on Form 10-K for its fiscal year ended December
31, 1998, as filed with the Securities and Exchange Commission (the "1998 Form
10-K"). Results for the periods reported herein are not necessarily indicative
of results that may be expected for the full year or in future periods.
Results of Operations for the Three Months Ended June 30, 1999 and 1998
Net Sales
Net sales for the three months ended June 30, 1999 were $14,708,000
compared to $14,306,000 for the same period in 1998, representing an increase of
$402,000, or 2.8%. The categories that contributed to the increase in net sales
for the quarter are consumer product packaging and music/audio packaging.
Consumer product packaging sales increased due to an increase in unit volume
sold to a distributor for packaging of a name brand food product. Music/audio
packaging sales increased as a result of increased unit volume within this
category. The Company has experienced industry-wide pressure to reduce the
per-unit price of its music/audio packaging products. The Company has offset the
price reductions by increasing the unit volume of sales of these products. Net
sales of video and entertainment software remained relatively unchanged, unlike
the increase experienced in net sales of these products in the quarter ended
March 31, 1999 versus the same period in 1998. The first quarter increase was
due to the timing of certain software sales and from significant
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sales in the first quarter of 1999 to a distributor of an exercise video.
Gross Profit
The Company recognized gross profit of $4,091,000 (a 27.8% profit margin)
for the three months ended June 30, 1999, as compared to $3,840,000 (a 26.8%
profit margin) for the same period in 1998, representing an increase of
$251,000, or 6.5%. The increased dollar amount and the improvement of one
percentage point in gross profit margin is primarily due to the Company's
continued focus on improving manufacturing processes and making capital
investments in more efficient equipment. Also, competitive purchasing practices
have resulted in reduced costs.
Selling, General, and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the three months
ended June 30, 1999 were $2,819,000 (19.2% of net sales) compared to $2,624,000
(18.3% of net sales) for the same period a year ago, an increase of $195,000.
The increase in SG&A is primarily due to normal inflationary increases, and
revenue related expenses such as freight to customers and commissions. On April
29, 1999, the Company entered into a consulting agreement with KPMG Quality
Registrar to assist the Company in becoming ISO 9000 certified. The Company
expects to receive its ISO 9000 certification by the end of the second quarter
of 2000. The estimated consulting fees and costs associated with this project
are expected to be approximately $100,000, of which the Company has incurred
approximately $30,000 in the second quarter of 1999.
Net Interest Expense
Net interest expense for the three months ended June 30, 1999 was $109,000
compared to $171,000 for the same period of the prior year. Interest expense
includes interest payable under the Company's revolving credit facility and
under capital lease obligations on equipment. The decrease is due to the decline
in the average borrowings under the Company's revolving credit facility and an
increase in interest income earned on overnight investments. Interest expense in
the third quarter of 1999 and future periods will increase as the result of the
Contemporary Color Graphics, Inc. acquisition.
See "Subsequent Events".
Income Taxes
The provision for income taxes for the three months ended June 30, 1999
was $464,000 compared to $413,000 for the same period in 1998, an increase of
$51,000. This increase was due to the increase in pre-tax income, with no
significant change in the effective tax rate.
Net Income
Net income for the three months ended June 30, 1999 was $700,000, compared
to $632,000 for the same period in the prior year, an increase of $68,000, or
10.7%. This increase in net income was a result of the increase in net sales,
the improvement in cost of sales as a percentage of net sales, and the decrease
in interest expense.
Results of Operations for the Six Months Ended June 30, 1999 and 1998
Net Sales
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Net sales for the six months ended June 30, 1999 were $29,603,000 compared
to $26,918,000 for the same period in 1998, representing an increase of
$2,685,000, or 10.0%. The categories that significantly contributed to the
increase in net sales for this period were video and entertainment software
packaging, consumer product packaging, and music/video packaging. Video and
entertainment software packaging sales increased largely as a result of sales to
a national computer software firm and a distributor of a popular exercise video.
Consumer product packaging sales increased due to an increase in unit volume
sold to a distributor for packaging of a name brand food product. Music/audio
packaging sales also increased as a result of increased unit volume within this
category. The Company was able to offset industry wide pricing pressures in the
music/audio packaging industry with increased unit volume.
Gross Profit
The Company recognized gross profit of $7,515,000 (a 25.4% profit margin)
for the six months ended June 30, 1999, as compared to $6,737,000 (a 25.0%
profit margin) for the same period in 1998, representing an increase of
$778,000, or 11.5%. Despite industry wide pricing pressure, the Company has
managed to maintain a cost structure which has allowed gross profit margins to
remain relatively consistent. The Company continues to focus on improving
manufacturing processes and making capital investments in more efficient
equipment.
Selling, General, and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the six months
ended June 30, 1999 were $5,618,000 (19.0% of net sales) compared to $5,154,000
(19.1% of net sales) for the same period a year ago, an increase of $464,000.
The increase in SG&A is primarily due to normal inflationary increases, and
revenue related expenses such as freight to customers and commissions. The
Company also incurred approximately $10,000 and $30,000, respectively, in the
first and second quarters of 1999 for consulting costs related to the beginning
stages of pursuing ISO 9000 certification. See "Result of Operations for the
Three Months Ended June 30, 1999 and 1998 - Selling, General and Administrative
Expenses".
Net Interest Expense
Net interest expense for the six months ended June 30, 1999 was $232,000
compared to $342,000 for the same period of the prior year. Interest expense
includes interest payable under the Company's revolving credit facility and
under capital lease obligations on equipment. The decrease is due to the decline
in the average borrowings under the Company's revolving credit facility and an
increase in interest income earned on overnight investments. Interest expense in
the third quarter of 1999 and future periods will increase as the result of the
Contemporary Color Graphics, Inc. acquisition.
See "Subsequent Events".
Income Taxes
The provision for income taxes for the six months ended June 30, 1999 was
$665,000 compared to $492,000 for the same period in 1998, an increase of
$173,000. This increase was due to the increase in pre-tax income, with no
significant change in the effective tax rate.
Net Income
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Net income for the six months ended June 30, 1999 was $1,001,000,
compared to $750,000 for the same period in the prior year, an increase of
$251,000, or 33.5%. This increase in net income was a result of the increase in
net sales and the improvement in gross profit as a percentage of net sales and
the decrease in interest expenses.
Liquidity and Capital Resources
The primary source of cash for the Company's business has been cash flow
from operations and availability under the Company's $10 million revolving
credit facility. Cash as of June 30, 1999 was approximately $583,000, compared
to approximately $33,000 as of June 30, 1998. Cash flow from operations in the
first half of 1999 increased to approximately $2,695,000 from approximately
$1,702,000 in the first half of 1998, primarily due to continued profitable
operations and collection efforts, which led to a decrease of approximately
$1,865,000 in accounts receivable. The Company expects to use the additional
cash for future capital investments and to assist in the financing of future
acquisitions. As of June 30, 1999, the Company had working capital of $7,466,000
and the full $10 million was available to the Company under its revolving credit
facility.
The Company anticipates capital expenditures of approximately $7 to $10
million for the remainder of 1999, primarily for the purchase of manufacturing
equipment to increase capacity and further improve plant efficiencies and
acquisition. The Company intends to finance such capital expenditures through
capital leases and the Company's revolving credit agreement.
Subsequent Events
As previously reported, on July 1, 1999, the Company completed the
acquisition of substantially all of the assets and certain liabilities of
Contemporary Color Graphics, Inc. ("CCG"). CCG is a high-quality commercial
printer located in Edgewood, New York. CCG has been in business for
approximately eleven years and has grown to approximately $8.0 million in annual
revenue. The purchase price consisted of $3,500,000 in cash, a promissory note
in the amount of $1,000,000, a supplemental note in the amount of $1,000,000,
convertible debentures in the amount of $600,000 and assumed debt of
approximately $1,400,000, subject to adjustment. The Company paid the cash
portion of the purchase price from borrowings under its revolving credit
facility. The Company's management believes that it will incur increased
interest expenses in future periods due to the payment of interest under its
credit facility and under the note, supplemental note and debentures. Principal
payments will commence on August 1, 2000 with respect to the promissory note and
debentures, and on August 1, 2003 with respect to the supplemental note. The
Company expects that it will be able to offset these increased expenses with
increased net sales attributable to the CCG acquisition, but there can be no
assurance as to such future sales levels or as to the Company's ability
successfully to integrate the operations of CCG into its business. CCG has the
option to convert the debentures into shares of Disc Graphics common stock,
valued at $5.50 per share, at least 30 days before any principal or interest
payment on the debentures.
Year 2000 Compliance
The Company has substantially completed the process of identifying,
assessing and developing contingency plans to address problems that may arise as
a result of the inability of the Company's computers, or those of its material
vendors and customers, to properly recognize and manipulate dates in the Year
2000 beginning with the first two digits "20" instead of "19." In its evaluation
process, the Company considers a computer to be Year 2000 compliant if: (a) any
valid date, both before and
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after December 31, 1999 (including February 29, 2000), does not cause an
interruption in the desired operation; and (b) (i) the computer will correctly
sort, calculate and compare all dates; and (ii) if the first two digits of the
date are implicit, ( i.e., the date is represented by only 2 digits, e.g., "99"
for "1999" and "00" for "2000"), the computer will interpret the dates
consistently and with the result that "99" always means 1999, and "00" always
means 2000).
The Company's evaluation of the Year 2000 problem included the assessment
of its computer systems and its equipment and other systems that are controlled
or monitored by computers or embedded computer chips, and the ability of its
critical vendors and customers to ensure timely delivery of goods and services
and payment of invoices, respectively.
In March 1997, the Company installed a fully-integrated computer system
that is Year 2000 compliant. The software calculates the date incrementally from
a fixed past date, using a five-byte data field (compared to the standard
two-byte data field). For example, from the date of March 1, 1916, the software
can calculate incrementally 99,999 days from that fixed date, approximately
until the year 2189. Each software module has been examined to confirm that it
uses the five-byte date field in all date sorts, calculations and comparisons.
During the fourth quarter of 1998, the Company performed a full test of the
software by advancing the date past 2000 (including February 29, 2000) and ran
each software module with test data to confirm empirically that the system
accommodates the century rollover. The test confirmed that all mission critical
modules are Y2K compliant. Several modules contained two or eight character date
fields that are not used in calculations, and are not adversely affected by the
date change. One module that contained a two character date field that is used
in calculations and was fixed and fully tested. During the third quarter of
1999, the Company intends to conduct additional in-house tests to verify tests
performed by the software manufacturer.
The Company has also tested the Year 2000 compatibility of each desktop
and portable computer and each piece of equipment containing an embedded
computer chip, by confirming empirically that each computer and its associated
software and each piece of equipment will function properly with dates occurring
both before and after 2000. The tests confirmed that each personal computer
either is Y2K compliant or will function properly.
The Company's business could be materially affected if its material
vendors and customers, or other vendors or customers that in the aggregate may
be material, are not themselves Year 2000 compliant. In particular, if the
Company is unable to obtain necessary supplies, services or critical machine
parts, its operations could suffer. If its major customers or a significant
number of its other customers are unable to make payments or continue purchases,
the Company's cash flow could suffer. The inability of certain utilities to
supply power or telephone service after the rollover could also adversely affect
the Company's operations. In order to assess and address such problems, the
Company surveyed all its vendors and customers to determine their likely state
of Year 2000 compliance at the rollover. The survey revealed that all material
vendors and customers report that they are Y2K compliant or will be before
December 31, 1999.
Although the Company is currently unaware of any vendor or customer who
will not be Year 2000 compliant, it has and will continue to develop contingency
plans in the event any vendors or customers are unable, in the Year 2000, to
fulfill their supply or payment obligations to the Company. In particular, the
Company has taken steps to ensure that no significant vendor is a sole-source or
limited- source supplier, by arranging multiple sources for all critical
resources, by warehousing or stocking a limited supply of critical materials and
parts, and by developing the ability to fabricate critical machine parts in an
in-house facility.
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The Company has reviewed with its insurer whether present policies provide
any coverage for potential business losses and liability to third parties
resulting from the Company's failure or inability to be Year 2000 compliant due
to factors not under its control. The insurer has advised that the relevant
policies do not contain exclusions for Y2K related losses and that each claim
would be evaluated during the normal adjusting process.
The Company has established a Year 2000 Compliance Committee to assess the
impact of the Year 2000 problem on the Company's business and to ensure its Year
2000 compliance. The Committee is co-chaired by the Vice President for Legal
Affairs and the Management Information Systems Manager, and is comprised of
representatives from all major departments and all facilities within the
Company. Management has committed all resources, both financial and personnel,
reasonably necessary to achieve Year 2000 compliance and/or to implement its
contingency plans for events outside its control. The Company does not believe
that the costs it has incurred to date or currently expects to incur in future
periods are or will be material, in the aggregate, primarily because these costs
have been and will be incurred in connection with projects begun before, and/or
budgeted without regard to, the Company's Year 2000 compliance efforts.
Although the Company believes it is fully Year 2000 compliant, there can
be no assurance that the Company successfully identified all systems, vendors or
customers which are not Year 2000 compliant, that the Company will not have to
increase significantly its expenditures relating to any such non-compliance, or
that its business will not be materially adversely affected by any such
non-compliance.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company finances the purchase of production equipment and other
capital expenditures through long-term debt and/or capital leases. The stated or
implicit interest rates on such obligations are generally fixed. In those
instances where rates are variable, the Company will generally fix the rate
through an interest rate swap agreement. Accordingly, the Company does not
believe it is materially exposed to changes in interest rates.
The Company does not have any sales, purchases, assets or liabilities
denominated in currencies other than the U.S. dollar, and as such is not subject
to foreign currency exchange rate risk.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the opinion of the Company's management, there are no pending legal
proceedings, other than ordinary routine litigation incidental to the Company's
business, which either individually or in the aggregate are likely to have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On May 21, 1999, the Company held its Annual Meeting of Stockholders. The
stockholders elected Seymour W. Zises and Mark L. Friedman as the Class I
directors, to serve until the Annual Meeting of Stockholders in 2002 or until
their successors have been elected and qualified or until their earlier
resignation, retirement, disqualification, removal or death. Mr. Zises and Mr.
Friedman each received 5,104,613 votes in favor of his election, with 360 votes
withheld, no abstentions and no broker non-votes. The stockholders also ratified
the appointment of KPMG LLP as the Company's independent auditors for 1999, with
5,104,973 votes in favor, no votes opposed, no abstentions and no broker
non-votes.
Item 5. Other Information
Not applicable.
Item 6(a) Exhibits
The Exhibits to this Quarterly Report on Form 10-Q are listed in the
Exhibit Index which appears elsewhere herein and is incorporated herein by
reference.
Item 6(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during its fiscal
quarter ended June 30, 1999.
-14-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DISC GRAPHICS, INC.
(Registrant)
July 30, 1999 /s/ Donald Sinkin
---------------------
Donald Sinkin - President
July 30, 1999 /s/ Margaret Krumholz
-----------------------
Margaret Krumholz - Chief Financial Officer
-15-
DISC GRAPHICS, INC.
Quarterly Report on Form 10-Q
for the Fiscal Quarter Ended June 30, 1999
EXHIBIT INDEX
Exhibit
Number Description
2.1 Asset Purchase Agreement dated as of July 1, 1999, by and
among the Registrant, Contemporary Color Graphics, Inc.
("CCG") and the shareholders of CCG named therein (filed as
Exhibit 2.1 to the Registrant's Form 8-K dated July 1, 1999
and incorporated herein by reference).
2.2 Promissory Note dated July 1, 1999, made by the Registrant
to CCG in the principal sum of $1.0 million (filed as
Exhibit 2.2 to the Registrant's Form 8-K dated July 1, 1999
and incorporated herein by reference).
2.3 Supplemental Note dated July 1, 1999, made by the Registrant
to CCG in the principal sum of $1.0 million (filed as
Exhibit 2.3 to the Registrant's Form 8-K dated July 1, 1999
and incorporated herein by reference).
2.4 Security Agreement dated July 1, 1999 between the Registrant
and CCG (filed as Exhibit 2.4 to the Registrant's Form 8-K
dated July 1, 1999 and incorporated herein by reference).
2.5 Agreement of Amendment dated July 1, 1999, between KeyBank
National Association and the Registrant (filed as Exhibit
2.5 to the Registrant's Form 8-K dated July 1, 1999 and
incorporated herein by reference).
4.1 Convertible Debenture due July 1, 2002, issued by the
Registrant to CCG on July 1, 1999, in the principal amount
of $600,000 (filed as Exhibit 4.1 to the Registrant's Form
8-K dated July 1, 1999 and incorporated herein by
reference).
27.1* Financial Data Schedule
*Filed herewith
-16-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE COMPANY'S UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000904541
<NAME> DISC GRAPHICS, INC.
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 583,282
<SECURITIES> 0
<RECEIVABLES> 11,981,673
<ALLOWANCES> (1,338,000)
<INVENTORY> 2,602,269
<CURRENT-ASSETS> 15,192,627
<PP&E> 19,919,526
<DEPRECIATION> (9,464,392)
<TOTAL-ASSETS> 28,605,541
<CURRENT-LIABILITIES> 7,726,447
<BONDS> 4,614,964
0
0
<COMMON> 55,488
<OTHER-SE> 14,885,642
<TOTAL-LIABILITY-AND-EQUITY> 28,605,541
<SALES> 29,602,670
<TOTAL-REVENUES> 29,602,670
<CGS> 22,087,438
<TOTAL-COSTS> 22,087,438
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 212,416
<INTEREST-EXPENSE> 231,515
<INCOME-PRETAX> 1,665,996
<INCOME-TAX> 665,000
<INCOME-CONTINUING> 1,000,996
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,000,996
<EPS-BASIC> 0.18
<EPS-DILUTED> 0.18
</TABLE>
